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Oil Update: Back to the future, again

A look forward—and a look backward—on oil consumption and pricing.

By Larry Lapide ·
January 25, 2018

This represents an annual update on oil pricing that began 11 years ago with my first two Insight columns *. I began researching this issue in 2004 when I launched MIT’s Supply Chain 2020 Project. Since then I have been espousing a reduction of oil consumption in global supply chains—by slowing them down and developing cost- and energy-efficient networks, in contrast to cost- and asset-efficient ones.

The position was based on two assumptions. While oil would be available into the foreseeable future:

its price would rise in the long-run as demand for it rose with global economic growth; and

oil extraction costs would continue to rise over time because it was getting harder to extract it from the earth. I did not focus on the popular “peak oil” proposition that focuses on oil production, because it would not be as robust as considering demand-supply imbalances.

It’s time to do a post-mortem on those assumptions because oil prices appear to have flattened to an “era of cheaper oil,” in which oil pricing is about double (in real terms) what it was during the “cheap oil era.” That era started three decades ago and coincided with the reconfiguration of globalized supply chains. It appears that while my assumptions held for several years, the recent past has created a different picture of both the demand for and the supply of oil.

Oil price update

Figure 1 shows that there was a “cheap oil era” from the mid-1980s until early 2004, in which real (deflated) prices bounced around from $20 a barrel to $30 a barrel. Beginning in 2004 prices started to rise. At that time, the Supply Chain 2020 project team decided that oil price growth needed to be a macro-factor that we would keep our eyes on. Supply chain operations consume lots of oil and other carbon-based energy sources, and the heydays of supply chain management coincided with the “cheap oil era” (thus affecting business practices).

The price rise continued for about four years until it peaked to over $132/ barrel in mid-2008, at which point it dropped precipitously for the next three quarters to a low of around $40/barrel. For the next five years it rose sharply and appeared to stabilize on a “$100+ plateau” for about three and a half years; after which it dropped again to recent prices that hover around $50/barrel in today’s “era of cheaper oil.”

This represents an annual update on oil pricing that began 11 years ago with my first two Insight columns *. I began researching this issue in 2004 when I launched MIT’s Supply Chain 2020 Project. Since then I have been espousing a reduction of oil consumption in global supply chains—by slowing them down and developing cost- and energy-efficient networks, in contrast to cost- and asset-efficient ones.

The position was based on two assumptions. While oil would be available into the foreseeable future:

its price would rise in the long-run as demand for it rose with global economic growth; and

oil extraction costs would continue to rise over time because it was getting harder to extract it from the earth. I did not focus on the popular “peak oil” proposition that focuses on oil production, because it would not be as robust as considering demand-supply imbalances.

It’s time to do a post-mortem on those assumptions because oil prices appear to have flattened to an “era of cheaper oil,” in which oil pricing is about double (in real terms) what it was during the “cheap oil era.” That era started three decades ago and coincided with the reconfiguration of globalized supply chains. It appears that while my assumptions held for several years, the recent past has created a different picture of both the demand for and the supply of oil.

Oil price update

Figure 1 shows that there was a “cheap oil era” from the mid-1980s until early 2004, in which real (deflated) prices bounced around from $20 a barrel to $30 a barrel. Beginning in 2004 prices started to rise. At that time, the Supply Chain 2020 project team decided that oil price growth needed to be a macro-factor that we would keep our eyes on. Supply chain operations consume lots of oil and other carbon-based energy sources, and the heydays of supply chain management coincided with the “cheap oil era” (thus affecting business practices).

The price rise continued for about four years until it peaked to over $132/ barrel in mid-2008, at which point it dropped precipitously for the next three quarters to a low of around $40/barrel. For the next five years it rose sharply and appeared to stabilize on a “$100+ plateau” for about three and a half years; after which it dropped again to recent prices that hover around $50/barrel in today’s “era of cheaper oil.”

If history is our guide, economies take a turn every nine years. Yet time and again, a strong business cycle and fading memories convince us the good times will go on forever. Ten years after the great recession, we surveyed 100 manufacturing firms to find out if businesses are ready to fight through the next recession.

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